To prevent a nosedive in bilateral relations, it is imperative for both sides to handle the situation maturely.
The recent political events across India’s eastern border have the potential to significantly strain the hitherto cordial and mutually beneficial relations between the two populous neighbours, Bangladesh and India. Since playing a crucial role in the birth of Bangladesh in 1971, India has maintained strong ties with its neighbour, despite numerous significant internal political and social developments in the young nation. In recent years, Bangladesh’s economy has seen striking improvement, although the benefits have not trickled down evenly. This progress, however, could prove to be fleeting if the recent political upheaval is allowed to simmer for too long, and if multiple far-reaching changes are pursued simultaneously in the beleaguered nation.
The multidimensional support and diverse assistance from India, along with strong bilateral trade and investment flows, have been of considerable value to Bangladesh. The nation of 170 million has lifted itself out of the economic morass of being a least-developed nation, with sub-par economic and social indicators for most of its 53 years of existence.
Bangladesh has now joined the global community of more respected developing countries, with significantly lower levels of extreme poverty and vastly improved access to essential services. Political wisdom and pragmatism on both sides of the border have sustained the relationship, enabling people-to-people contacts to open up new avenues of friendship and cooperation in areas such as tourism, work visas, medical care, and education.
At the official level, successive administrations in these two large democracies may have experienced some inevitable ups and downs with changes in government. However, the trajectory and intensity of mutual understanding, cooperation, and collaboration have consistently moved upward. This has ensured that no third country, regardless of its resources or ability to offer sizeable inducements, has been able to meaningfully persuade either nation to distance itself from the other. The frequent interactions between the two cordial neighbours—who share almost similar levels of social and economic development and have numerous families across their 4,100-kilometer-long common border—have remained firmly intact, both bilaterally and in international fora. There are hardly any intractable issues outstanding between them.
ECONOMIC PROGRESS AND THE BUMPY PATH AHEAD
Bangladesh’s decade-long economic turnaround, with an average annual GDP growth of nearly 7%, has boosted per capita income to $2,646, slightly surpassing that of India, despite both countries still experiencing steady population growth. However, as in India, progress in agriculture—the mainstay of their populations—has been notably slow. This sector urgently requires greater public investment and the infusion of capital and technology to diversify, reduce labour intensity, and increase productivity for those who rely on it for their livelihoods.
Under employment on farms is widespread, and, unfortunately, job availability in urban areas remains limited. Real wages have stayed woefully low, and among the youth, particularly the educated, unemployment is significantly higher across the border. This has been a primary cause of the recent nationwide protests and violence, which ultimately led to the military’s intervention and the subsequent demand for the resignation and exile of Sheikh Hasina, the Awami League leader and Prime Minister for 15 consecutive years, to India.
The economic growth of recent years had lulled the extant leadership into complacency, greater authoritarianism and frequent incursions on the freedoms and human rights of its citizens. The national elections held in January 2024 saw barely 40% of the usually enthusiastic voters turning out to cast their ballots. The Bangladesh Nationalist Party (BNP), the main opposition, boycotted the election due to its leader, Khaleda Zia—a two-time Prime Minister—being kept under house arrest. After being voted back for a fourth term, Prime Minister Sheikh Hasina decided to reserve 30% of government jobs for the descendants of freedom fighters from the 1971 War of Liberation, a group widely seen as supporters of her Awami League. This decision ignited unrest in early July in a society already grappling with diminished economic resilience and starkly unequal distribution of income and wealth.
The suppression of emotionally charged young protesters, who took to the streets in large numbers, resulted in 260 of them being killed by the police. This crackdown proved politically costly for the ruling elite, who were increasingly seen as detached from the common citizen. Ultimately, the wavering law enforcement agencies, many of whom had already abandoned their posts, refused to continue following the directives of the civilian government. The military’s advice to Sheikh Hasina and her colleagues to resign was more of an ultimatum than a suggestion. The people-led movement was dubbed a revolution by the students, who continue to play a significant role in the new interim government led by the respected 84-year-old Nobel Laureate Muhammad Yunus. According to the Constitution, fresh elections must be held within three months under such circumstances. The released BNP leader, Begum Khaleda Zia, is prepared to contest, as is the Jamaat-e-Islami, whose prohibition was promptly lifted.
IMPORTANCE OF TEXTILE AND GARMENT INDUSTRY
The unevenness in economic development in Bangladesh has become increasingly palpable over the years. A structural deficiency exists in the Bangladeshi economy due to its disproportionate reliance on the textile and ready-made garment industry. As the world’s second-largest producer of clothing, this industry has become the backbone of the country with it accounting for 20% share in the GDP. Its foreign exchange earnings account for 87% of its $54.7 billion in exports in 2023. It also contributes significantly to domestic revenue through levies and provides substantial formal sector employment. The industry’s viability in the international market is partly due to the zero tariffs imposed by industrialized nations on exports from least-developed countries—a status Bangladesh will retain only until 2026, as it has moved up the ladder in terms of per capita income.
Bangladesh’s competitiveness also stems from its low wage costs relative to the productivity of its workforce. The oligarchy of manufacturers that controls the industry has, until recently, been able to influence the authorities to keep real minimum wages just high enough to sustain basic living. However, in recent months, exports to the US, its largest market, have come under pressure due to modest increases in minimum wages, now set at the equivalent of $115 per month. These increases followed nationwide demands after a tragic factory fire in October 2023, which claimed the lives of nearly 1,000 workers due to unsafe working conditions.
Of late, there has also been a shift in consumer interest toward trendier items produced elsewhere, coupled with emerging competition from India, Indonesia, and Vietnam, which also produce their own fabric. The recent disruptions in cargo movement due to the protests have further reduced shipments out of Bangladesh. Prolonged political uncertainty, if the required national elections are deferred, is likely to adversely impact the country’s well-being, as clothing brands are agile and can quickly shift their import orders elsewhere.
INDIA’S STAKE IN BANGLA WELL BEING
The current annual official trade between India and Bangladesh stands at $12.9 billion, with the Indian exports accounting for $9.6 billion. The major exports from India include fabric for Bangladesh’s growing textile sector, followed by petroleum, chemicals, cotton, iron and steel, and automobiles. Onion exports from India grew last year to about 0.8 million tonnes, valued at Rs 3,513 crores. Indian imports from Bangladesh are primarily certain textiles and ready-made garments. The two countries have been discussing a possible Free Trade Agreement. Bilateral trade usually occurs at designated points along the land border.
Both sides have been working on plans to enhance infrastructure connectivity—physical, energy, and digital. India is already exporting electricity from its 1,260 MW installed generation capacity. India has also assisted in establishing half a dozen railway links, primarily with its adjoining northeastern states, and has provided three lines of credit totalling $8 billion. The long-pending water-sharing agreement at Farakka has benefited both sides, and the resolution of the Teesta river water dispute is expected to be similarly advantageous.
However, in the current year, economic relations are likely to face road bumps. Bangladesh’s energy imports have been affected by the Ukraine war, and per capita energy consumption has fallen to half of India’s levels, and even less than Pakistan’s, despite Pakistan’s per capita income being only half of Bangladesh’s. Approximately, $110 million of Indian capital is invested in various ventures in Bangladesh, but political events could check its further accretion for a while. With the country experiencing nearly 10% inflation over the past three months, disposable incomes are rapidly shrinking, impacting overall consumption and discretionary spending besides the imports from India.
Hopefully, if the people of Bangladesh have full recourse to the ballot and are no longer repressed, they can accept this temporary dip in growth. This will require India to maintain a supportive stance during the transition, avoiding an overly protective or collaborative approach towards Sheikh Hasina, despite her decades of cooperation with India. To gain credibility and regain the trust of the new administration in Dhaka, India must engage with all stakeholders in an assiduous and impartial manner, demonstrating a commitment to providing more substantial support than before. It must not appear to be seen carrying forward any residual baggage from the past.
Of course, India must remain vigilant about its security imperatives, ensuring that radical elements and terrorists from third countries do not use Bangladesh as a base to infiltrate and launch disruptive operations in India. The risk of such a scenario is real, particularly if the BNP, which has proximity to the pro-Pakistan group Jamaat-e-Islami, comes to power.
India will need to be firm in urging the new administration to effectively curb assaults on the 15 million Hindu minorities, who make up 8% of the population, regardless of their past support for the Awami League. Fortunately, both Mohammad Yunus and Bangladesh President Mohammed Shahabuddin have shown signs of reconciliation and have reassured the Hindu community about their safety. The caretaker government must take simultaneous measures to minimize sectarian violence and prevent deeper societal polarization. While catering to optics by both the caretaker and the elected government cannot be ruled out, India will need to learn to live with such dynamics and avoid any irresponsible rhetoric.
Bangladesh can be expected to shift towards a more pro-Western stance, given the reservations expressed by the USA, UK, and several EU nations regarding the fairness and transparency of the January 2024 elections. Aligning with this shift may be preferable to dealing with a neighbouring China that is completing its “necklace of pearls” strategy around India. Although the previous government had accepted China’s Belt and Road Initiative (BRI), last month China declined a $5 billion loan request from Bangladesh to address its depleting foreign exchange reserves and the sharp decline in the Taka’s value, which has dropped to 113 Taka per USD from 69 in 2009.
Frustrated by the cut-short visit to Beijing, Sheikh Hasina agreed to award the Mangala port development project to India rather than China, which had long sought the project. Regardless of whether the new government upholds this decision, India should continue to reassure and satisfy the Bangladeshi leadership on all bilateral issues despite the change of guard in Dhaka.
Dr Ajay Dua, a development economist, is an ex Union Secretary, Commerce & Industry.
Part II will deal with the future economic ties in greater detail.